https://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/corporations-dont-have-to-maximize-profits NYTimes.com no longer supports Internet Explorer 9 or earlier. Please upgrade your browser. LEARN MORE >> Sections Home Search Skip to content The New York Times Search Subscribe Now Log In 0 Settings Close search Site Search Navigation Search NYTimes.com [ ] Clear this text input Go 1. Loading... See next articles See previous articles Site Navigation Site Mobile Navigation Advertisement The Opinion Pages Room for Debate Corporations Don't Have to Maximize Profits Lynn Stout Lynn Stout, the distinguished professor of corporate and business law at Cornell Law School, is the author of "The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public." Updated April 16, 2015, 6:46 AM There is a common belief that corporate directors have a legal duty to maximize corporate profits and "shareholder value" -- even if this means skirting ethical rules, damaging the environment or harming employees. But this belief is utterly false. To quote the U.S. Supreme Court opinion in the recent Hobby Lobby case: "Modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not." The Hobby Lobby case dealt with a closely held company with controlling shareholders, but the Court's statement on corporate purpose was not limited to such companies. State codes (including that of Delaware, the preeminent state for corporate law) similarly allow corporations to be formed for "any lawful business or purpose," and the corporate charters of big public firms typically also define company purpose in these broad terms. And corporate case law describes directors as fiduciaries who owe duties not only to shareholders but also to the corporate entity itself, and instructs directors to use their powers in "the best interests of the company." Serving shareholders' "best interests" is not the same thing as either maximizing profits, or maximizing shareholder value. "Shareholder value," for one thing, is a vague objective: No single "shareholder value" can exist, because different shareholders have different values. Some are long-term investors planning to hold stock for years or decades; others are short-term speculators. The business judgment rule gives directors protection from judicial second-guessing about how to best serve their companies and shareholders. Also, most investors care not only about their portfolios, but also about their jobs, their tax burdens, the products they buy and the air they breathe. Which is to say, companies that maximize profits by firing employees, avoiding taxes, selling shoddy products or polluting the environment can harm their shareholders more than helping them. More to the point, corporate directors are protected from most interference when it comes to running their business by a doctrine known as the business judgment rule. It says, in brief, that so long as a board of directors is not tainted by personal conflicts of interest and makes a reasonable effort to stay informed, courts will not second-guess the board's decisions about what is best for the company -- even when those decisions predictably reduce profits or share price. Outside the rare case of a public company that decides to sell itself to a private bidder, the business judgment rule gives directors nearly absolute protection from judicial second-guessing about how to best serve the company and its shareholders. Although some Delaware cases talk about maximizing shareholder value in the long run, Delaware (like other states) applies the business judgement rule to protect directors of corporations that reduce profits and share price when directors claim this will ultimately help the corporation. In the 2011 case of Air Products, Inc v. Airgas , the business judgement rule allowed Airgas directors to refuse to sell the company, even though a sale would have given Airgas' shareholders a hefty profit. So, where did the mistaken idea that directors must maximize shareholder value come from? The notion is especially popular among economists unburdened by knowledge of corporate law. But it has also been embraced by increasingly powerful activist hedge funds that profit from harassing boards into adopting strategies that raise share price in the short term, and by corporate executives driven by "pay for performance" schemes that tie their compensation to each year's shareholder returns. In other words, it is activist hedge funds and modern executive compensation practices -- not corporate law -- that drive so many of today's public companies to myopically focus on short-term earnings; cut back on investment and innovation; mistreat their employees, customers and communities; and indulge in reckless, irresponsible and environmentally destructive behaviors. Join Opinion on Facebook and follow updates on twitter.com/ roomfordebate. Topics: Law, corporate responsibility, corporations Previous Stephen Bainbridge A Duty to Shareholder Value Stephen Bainbridge Next Tamara C. Belinfanti Social Good Is Not Inconsistent with Profit Tamara C. Belinfanti The Do-Gooder Corporation Does the law allow corporations to pursue social goals over shareholder profits? Read More >> Debaters * A Duty to Shareholder Value Stephen Bainbridge Stephen Bainbridge, author, "Corporate Governance After the Financial Crisis" * Corporations Don't Have to Maximize Profits Lynn Stout Lynn Stout, author, "The Shareholder Value Myth" * Social Good Is Not Inconsistent with Profit Tamara C. Belinfanti Tamara C. Belinfanti, professor, New York Law School * It's Law, But It Shouldn't Be David G. Yosifon David G. Yosifon, law professor, Santa Clara University * A Good Corporate Accounting of Social Costs Is Needed Jean Rogers Jean Rogers, Sustainability Accounting Standards Board Related Discussions Recent Discussions * When Do Consumer Boycotts Work? When Do Consumer Boycotts Work? * New Terms for Nafta? 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